Last night a lawsuit was filed by the law firm Newman Ferrara against Zynga over potential violations of federal laws that are meant to protect investors. The law firm claims that the top level employees, including Zynga CEO Mark Pincus among others, knew that the stock would crash back in April when they sold off half a billion in stock. Last week, Zynga’s stock did just that, as its value fell by 41% on the 25th of July.
While the CEO and his other high-level employees managed to avoid losing out in millions by the stock’s collapse, they’re likely to be in much hotter water. While acting on the insider knowledge to save their personal fortunes is bad enough, the lawsuit is also claiming that Zynga executives failed to disclose critical information to the other shareholders, including the “rapid decline” in subscribers and goods sold and also “substantial” delays on games like The Ville. While I don’t claim to be an expert in law, from what I can tell I have to wonder “How did these Zynga executives think they were going to get away with this?”
Apparently, the CEO thought if he ignored the issue then maybe nobody would notice. In a conference call held by Zynga to talk about their 2nd quarter financial results, Richard Greenfield, a BTIG analyst asked the CEO about the timing of the sale of stock. He responded off topic and merely said that “we believe in the opportunity for social gaming and play to be a mass-market activity, as it is already becoming.” It looks to me like Zynga’s top brass didn’t think this through all the way, and my guess is that they’ll be paying the price before too long.